active vs. passive

When you have set yourself a goal you expect to work hard to achieve the same. It is deeply ingrained into human nature that you need to be active in order to get something.
And even if we realize that our activism is just not good enough, at last get someone else to be active on our behalf.

But regrettably this won’t do when you are talking about your hard earned money.

When you try to beat the market, or search for someone to do it for you (a fund manager) unfortunately the costs in trying are going to eat into the returns, producing an average return of well below the market after costs.

Let's look at an example how you are likely to fear investing in an actively managed fund:

fund performances before costs market return

The twelve funds above together make up a market. The average market return earned by these funds is 5% (red line). As can be expected, some funds do better, and some do worse than the average.

But all these funds cost something to run, money that gets taken out of the fund. The result of this can be seen below, where the fund costs have been subtracted from the performance.

fund performences after costs what the investor get's

All over sudden your chance of picking the fund that actually beats the market becomes rather slim.

Active investing is akin playing the lottery, which can be quite fun, but you wouldn’t want to do so with your future pension?

When you choose to invest your riches passively, i.e. buying shares of a index-fund ort ETF's, you try to achieve the performance the market is offering, no more, no less. But you also try to do it with as little cost as possible, beating the majority of all other investors hands down.

There is a drawback to passive investing: it is profoundly BORING, it’s just nothing to brag about, it does not deliver “ahh’s” and “ohh’s” on your next party.

But Beware, not everything that has a label containing "index" is automatically a good deal: Caveat Emptor.